The recent explosion of home foreclosures has cast a spotlight on the dubious practice of granting subprime mortgages to people who could not afford them. In addition to the subprime crisis, a greater light is being cast upon the entire industry that often seeks to make money off of people who are poor. This industry was the recent focus of a report on the Bill Moyers Journal on PBS. Moyers and his colleagues, with the help of Business Week, examined the practices of the used car company, JD Byrider. Used cars are often sold to lower income buyers at interest rates that make it impossible for the buyer to keep the car. In fact, JD Byrider has it down to a formula. As the article in Business Week points out:
"Byrider dealers say they can generally figure out which customers will pay back their loans. Salesmen, many of whom come from positions at banks and other lending companies, use proprietary software called Automated Risk Evaluator (ARE) to assess customers' financial vital signs, ranging from credit scores from major credit agencies to amounts spent on alimony and cigarettes.Unlike traditional dealers, Byrider doesn't post prices—which average $10,200 at company-owned showrooms—directly on its cars. Salesmen, after consulting ARE, calculate the maximum that a person can afford to pay, and only then set the total price, down payment, and interest rate. Byrider calls this process fair and accurate; critics call it "opportunity pricing."
JD Byrider and the used car industry are not alone in turning a profit off of those who are struggling to make ends meet; criticism has also been leveled at the payday loan industry. This industry is designed to give people a short-term loan that is often intended to cover the borrower’s expenses until the borrower’s next payday. Loans are often due in a two week time period and (depending on the state) can carry an interest rate up to close to 400%. In a recent study, The Center for Responsible Lending reveals that:
“Despite attempts to reform payday lending, now an industry exceeding $28 billion a year, lenders still collect 90 percent of their revenue from borrowers who cannot pay off their loans when due, rather than from one-time users dealing with short-term financial emergencies.”
Also in the report, which you can download here, it is found that:
- 90 % of payday lending revenues are based on fees stripped from trapped borrowers, virtually unchanged from the 2003 findings.
- The typical borrower pays back $793 for a $325 loan.
- Predatory payday lending now costs American families $4.2 billion per year in excessive fees. - States that ban payday lending save their citizens an estimated $1.4 billion in predatory payday lending fees every year.
The majority of the money that is made in this industry is from borrowers who cannot pay back their initial loan and then take out another loan on top of the existing. This quickly leads to a cycle of debt from which it is often very tough to escape, especially considering the initial financial status of the borrower. This cycle of debt led to a total cost of $209 million to Ohio families according to the 2005 study by the Center for Responsible Lending. Lawmakers within Ohio realized that there was a problem and worked to pass Ohio H.B. 545.
Gov. Ted Strickland signed this bill into law on June 3rd of this year which caps the maximum interest rate that can be charged by payday loan companies, at 28%. While 28% still may seem like a high figure, it is quite a drastic change from the previous 391% that could be charged before the law was passed. The law would also limit how many loans individuals could take out at a time. Some institutions feel that such regulations on the payday loan industry are inappropriate in a so-called free-market society. A group called Ohioans for Financial Freedom has started circulating a petition to gather signatures in order to repeal Section 3 of Ohio H.B. 545. This group has also started a television campaign in which they are running the following ad:
Ohioans for Financial Freedom are funded by the lobbying group CFSA, the Community Financial Services Association, and are pushing hard to gather enough signatures before the law takes effect on September 11th. This group must gather 241,365 signatures before the law takes effect which will then allow the opportunity for the law to be repealed on November 4th. There has been much criticism of the efforts of those who are seeking the repeal of the law. This article in the Toledo Blade quotes people who claim that those seeking the signatures misrepresented the issue and even bribed homeless people with money in return for signing the petition. This article, posted on Forbes.com, speaks to audio tapes and affidavits obtained by the Coalition for Responsible Lending, that suggest that circulators of the petitions are often uninformed on the issue and have mislead citizens on what they were signing.
As controversy continues to surround this issue, it may be surprising to see who is lining up on the side of the payday lenders. This recent online article in Mother Jones magazine outlines how prominent civil rights voices and groups have lined up behind CFSA in their attempt at fighting off strict regulation of the payday loan industry. Groups such as the Congress on Racial Equality (CORE) and the National Conference of Black Mayors have aligned themselves with CFSA because, as stated in Mother Jones:
“They provide a public service by catering to the "unbanked" and other financially underserved communities—i.e., those discriminated against by white banks that won't make loans to African Americans. Without payday or other subprime lenders, they argue, many poor minorities would have no way of buying homes or keeping their lights on in an emergency.”
While the African American community does have a history of being discriminated against by the banking industry, payday loans at such high interest rates will do little to solve the problem of poverty or provide any reasonable long-term solution to the struggle of economic mobility within African American communities. I recently asked the President of the Cincinnati NAACP, Christopher Smitherman, to weigh in on this issue. “The Cincinnati NAACP does not support a 400 percent interest rate for any American citizen,” Smitherman stated. When asked about why civil rights groups seem to be divided on this issue, Smitherman chose not to comment, but in reference to groups like Ohioans for Financial Freedom, Smitherman added “The organization does have the right to collect signatures to place issue on the ballot. I think voters will make the right decision and not allow a 400 percent interest rate.” I also contacted the office of Mayor Mark Mallory as well as the Urban League of Greater Cincinnati for comment, but my phone calls and emails were not returned.
While the Cincinnati NAACP seems to support a cap on payday loan interest rates, other civil rights organizations continue to work with CFSA and have even invoked the memory of Civil Rights leader Martin Luther King Jr. As stated in the Mother Jones article:
“Payday lenders were popular honorees this year among civil rights groups celebrating the birthday of Martin Luther King Jr. The president of CFSA, the payday lending industry lobby group, chaired the Congress of Racial Equality's (CORE) Martin Luther King Jr. awards dinner in January. To honor the King holiday this year, SCLC gave its presidential award to CompuCredit's Harrod for her "leadership in the struggle for economic justice through the political process."
CompuCredit was sued last year by the Federal Trade Commission for violating the Fair Debt Collection Practices Act and for “deceptive practices” that often left their borrowers in so much debt, that it was difficult for them to get out.
CompuCredit, J.D. Byrider, and CFSA are all part of the industry that makes the majority of its profits from those who have difficulty making ends meet. From formulas that are designed for the purpose of milking as much money out of people as is possible to charging exorbitant interest rates that spin people into a cycle of debt, it is clear that this industry is doing little to help those in society who need the most help. The connection of CORE and the National Conference of Black Mayors to groups like CFSA work to legitimize the payday lending industry as an important economic tool to the African-American community. The studies that have been conducted and the reports that have been filed seem to indicate that this industry is doing little for the economic mobility of the African-American community while making solid profits for the lenders.
It remains to be seen if this issue will come to a vote in Ohio on November 4th, but if the issue does appear on the ballot, let’s hope that citizens can sift through all the details before they head into the voting booth.
This article can also be found at http://www.cincinnatibeacon.com